THE slowdown in India’s GDP growth to 5.3 per cent in the last quarter of the current fiscal year is alarming because the country has come to be known globally as a fast-growing emerging economy. For the past five years it has experienced much higher growth rates of around 8 per cent. Today, however, we can find consolation if we look around the world because many countries are experiencing zero to less than 1 per cent growth, especially in some countries in the European Union (EU). But for India, which is not an industrialised country yet, maintaining a high rate of growth - above 6 per cent - is very important for generating employment for thousands of youngsters who are joining the labour force every year.
The decline in GDP growth has been due to a slowdown in industrial growth, which contracted by 3 per cent in March. Growth in this sector (especially in manufacturing) happens to be the most important component of GDP growth. Industrial growth has been falling because of low investments and high input costs. Many industries are not expanding their capacity or making new investments because of rising fuel and raw material prices and lack of business confidence. The fall in investment has also been due to the high interest rates which have prevailed for the last one and a half years. The RBI raised interest rates 13 times to contain inflation.
Inflation has come down from the double digit level but is again high at 7.23 per cent and the newly constructed Consumer Price Index (CPI) is at 10.3 per cent. There has been a move from the RBI to soften the interest rates, but even with a significant reduction, the problem of slow GDP growth may not be solved. This is because the global and domestic demand has now been affected.
The Eurozone crisis has led to a contraction in demand for Indian exports, though service exports are still doing well. Export growth has been falling and the Commerce Minister has come up with a package of incentives for exporters to make their products, especially labour-intensive goods, more competitive. Otherwise there would be big job losses in the export sector. The incentives have been necessary because of the falling rupee value which, though, has given a boost to some exports, has resulted in a rise in input costs and general loss of competitiveness vis-à-vis India’s competitors.
Just as export growth and the global demand are important drivers of industrial growth, the domestic demand is also extremely important for maintaining industrial growth at a high pitch. So far, the domestic demand, especially rural demand, was not a problem and cars, motor cycles, fast moving consumer goods and consumer durables got sold rapidly. But now the steep petrol price hike will give a fresh boost to inflation and people may start cutting down on purchases all round and it may have a strong impact on the demand for goods and services.
The rural demand may shrink significantly because there has been a decline in agricultural growth recently. It was 1.9 per cent in April and for two years it has not reached the targeted level of 4 per cent and was around 2.5 per cent. Though there is record cereal harvest this year, other food products like dairy items, fruits, vegetables and pulses have not recorded high productivity - as a result, their prices are going up daily, contributing to inflation. The supply constraint of these food items have to be resolved to control the price rise.
If the domestic demand stagnates further as a result of two years’ of inflation and now industrial and agricultural stagnation, the focus of the government should be on boosting the domestic demand somehow. The Chinese are doing the same in the face of falling GDP growth. They have the opposite problem of too much investment and a higher savings rate (42 per cent) than India ( 32 per cent). The government is toying with the idea of increasing public spending on healthcare and pensions to enable people to save less and spend more. Maybe the Indian government should do the same.
There is a big need for more private domestic and foreign direct investment also. Our own industrialists have been going abroad to borrow money because of the high interest rates at home. Their external commercial borrowings (ECBs) have created a short term foreign debt of $137 billion which has made the corporate sector vulnerable to redemption pressure, especially when the rupee is low. Though foreign direct investment has been flowing in and was at $36.5 billion in the current fiscal year (2011-12), there is a need for more investment. Many Indian industrialists have been investing abroad mainly through the merger and acquisition route to start manufacturing abroad. Outbound FDI was at $2.77 billion in March. The reason is cheaper operational costs abroad and better infrastructure.
To make India an attractive destination for investment for both Indians and foreigners will require quick implementation of all the pending major infrastructure projects and to see that some important Bills are passed in Parliament. The government has to manage the rupee also and see that it does not sink further as it will create problems with imports which will cost more. Already the current account deficit is unsustainable and could reach $75 billion, nearly 4 per cent of the GDP.
The investment rating agency Standard & Poor’s has downgraded economic outlook for India to BBB(-) from Stable, because of the government’s huge public borrowings and inability to contain the fiscal deficit. It is the lowest investment grade rating and the government has to work towards bringing back investor confidence by reducing the fiscal deficit to at least 5.1 per cent. There may be a big cut in subsidies and an austerity package has been announced by Finance Minister Pranab Mukherjee. Austerity should definitely mean cut in government spending on ministerial and VIP foreign visits and a reduction in expenditure on conferences by not holding them in five- star hotels. Though a freeze has been imposed on the creation of new posts in the government, it should not include job cuts in the public sector because it would bring about widespread protests in India just like in Europe. Joblessness is more dangerous in the Indian context because people do not have any safety net to fall back upon.
Important Bills have to be passed through Parliament as it will clarify the position of foreign investors waiting to invest in India, especially in the tribal regions, rich in minerals. With a strong leadership at the top, the economy can be steered away from an impending crisis.
(The writer is a Senior Fellow at Observer Research Foundation)
Courtesy: The Tribune
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